Business View: Private equity may have passed its peak

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The Independent Online

The behaviour of last week's equity markets was a bit of an anti-climax after the turbulence of the preceding fortnight. Central banks have poured tens of billions of dollars into markets, which, together with hints that the US Federal Reserve might cut interest rates, has acted like a financial valium for panicky traders.

But it is too early to draw a sigh of relief and conclude that everything is back to normal. There will be far reaching consequences to the global credit crunch that has made a mockery of investor business models that were based on assumptions that, in hindsight, have proved to be bogus. The greatest and perhaps most beneficial result of this volatility is that investment banks, private equity companies and hedge funds will all have to re-assess risk. As Anthony Bolton, the fund manager Yoda at Fidelity said in these pages last week, greed has been replaced by fear. And given the heady bull run of the last few years and the willingness of hedge funds in particular to take extreme levels of debt on board, this can only be seen as a good thing.

For private equity, the situation is particularly worrisome. Buyout funds live and breathe debt. If it becomes less available, which is now looking likely to be the case for the foreseeable future, dealflow will dry up. And then there is the question of what they do to the companies on their books. The secondary buyout market, where private equity group A sells a company to private equity group B, has been the lifeblood of the industry for the past year and will be hit hard if banks become reluctant to fund such deals. There is always the option for private equity groups to list the companies on their books. But as one banker pointed out to me last week, institutional investors will soon grow tired of all the one way traffic with nothing being taken into private hands.

Have we seen the high water mark for private equity? That in my view is a growing possibility.

Time for Delta Two plus

The Delta Two bid for Sainsbury's is taking an age. The board of the supermarket chain has been sitting on the bid proposal from the Qatari-backed fund for over five weeks and the market is starting to think the deal won't happen. The main sticking point is the amount of equity that Delta Two wants to commit to the bid. As it stands, the 600p per share offer consists of £4bn in cash and £6.4bn in debt. It is believed that Delta Two is prepared to throw in a bit more cash, but not the amount the supermarket board is looking for. To complicate matters, the Office of Fair Trading will look at the takeover on the grounds that if Sainsbury's becomes financially constrained by its debt, it will become less competitive relative to its main rivals, Tesco, Asda, and Morrisons. The board of Sainsbury wants to recommend the Delta two offer, but will not do so unless it is confident the deal will be approved. Delta Two has been less than forthcoming about several aspects of the structure of its proposal, leading to speculation that it has something to hide. For what it's worth, Delta Two has repeatedly assured Sainsbury's that it has the financial backing in place for the deal, despite recent market turbulence.

Sainsbury's shares closed on Friday at just 544.5p – well below the offer price – indicating that the market is far from convinced the Delta Two approach will succeed. But then, ICI's shares are well below the takeover price offered by Akzo, so Sainsbury's is hardly unique. I suspect the Qataris have a bit in reserve and will get a recommendation from the company's board eventually. If it doesn't have anything left to offer, it should never have made the approach in the first place.

Of wheat and weather

What will it take for UK consumers to really sit up and take notice of climate change?

Well maybe it will be when a weekly trip to the supermarket starts to get significantly more expensive. Food prices have been on the march for the last few years, but on Friday, wheat prices hit a new record.

The cause is poor weather - from droughts to floods that have hit harvests. In Canada (where crop yield estimates have been slashed by a fifth) and Europe fears are growing that supply may not meet demand. Bread, of course, will go up in price. But so will meat and other foods that are made from animals that eat grain. According to US figures, global wheat stockpiles are at their lowest levels for 26 years. In Australia, the world's third largest wheat exporter, harvests have been hit by warmer than expected weather in the spring. In China, crop levels have fallen by 10 per cent as a result of floods and drought. Demand for wheat from countries such as India and China, is rising, while food aid programmes are under threat from the hike in prices of wheat and other cereal crops.

In Britain, arable farmers are laughing all the way to the bank, but their brethren who rear livestock are already feeling the pinch.

As consumers, we are shielded from crop failures in certain parts of the world as importers can source goods from several different parts of the planet. But as the wheat price demonstrates, this ability no longer guarantees supply. As we experience more extreme weather both here and abroad, the situation is likely to worsen.

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